MNI INTERVIEW: Fed Cuts Start In Q4 As Tariffs Weigh -Crandall

President Trump's tariffs will likely take enough of a toll on the U.S. economy by the fourth quarter to necessitate a couple rate cuts by the Federal Reserve around year-end, Lou Crandall, chief economist at research firm Wrightson ICAP, told MNI on the sidelines of an Atlanta Fed conference in Amelia Island, Fla. 

The longer the White House vacillates between imposing and pausing tariffs, the longer the Fed will have to extend its wait-and-see stance, he said. Trump's "reciprocal" tariffs on dozens of trading partners are paused until early July to allow for trade deal negotiations and a 145% duty on Chinese imports has been temporarily reduced to 30% until August. 

"It’s probably reasonable to think we will have had enough accumulated economic deterioration by the fourth quarter to get a cut, and I doubt the Fed will move unless they’re pretty sure they’ll go at least twice. My baseline is a couple cuts bracketing year-end. Second one possibly out in the first quarter of 2026," said Crandall, who started his career at the New York Fed. 

"The latest 90-day pause on tariffs meant the administration is just kicking the tariff can down the road, but in doing so, they kicked the fed rate cut can 90 days down the road too, because they’re just extending the uncertainty the Fed has cited as the primary obstacle to an early rate cut," he said. 

"The longer the administration spins this out, in the absence of real persuasive economic data, we’re not going to get any change in Fed policy or Fed guidance – because it’s just all to be determined." (See: MNI INTERVIEW: Fed On Hold Until At Least December - Lacker)

PAYBACK PHASE

The U.S. economy was in a "frontrunning phase" at least through March and businesses and consumers ramped up purchases ahead of tariffs. As it transitions into a "payback phase," the economic data are set to weaken, Crandall said. 

The April retail sales data remained robust without reversing earlier gains, and the jobs report was stronger than expected. But the Chicago Fed National Activity Index, a monthly index designed to gauge overall economic activity and related inflationary pressure using big data, turned slightly negative in March and could sink further in April. That data is due Thursday.

Any macro impact from tax cuts and the budget bill won't be a major factor until they manifest in the real economy, and that's not in the near term, he said. A spending bill is coming up for a full House vote by the end of the week that would extend tax cuts. 

So far the main metrics aren't pointing to any imminent demise for economic growth, but that could change fairly quickly, Crandall said. 

"Another truce means another short-term spurt in demand, so we'll still have to wait and see," he said. "But in the end tariffs are very destructive for economic activity, so I would be very surprised by an outcome that would lead to hikes."